Sedona AZ (October 15, 2011) – by Sean Baguley, Sedona Eye Real Estate columnist.

I would like to start with what feels to me like some better news.

The table below shows the Median Prices for closed sales of Residential property only, in the whole of Sedona. I like the fact that the third quarter of 2011 shows a higher Median Price level, and that volumes have remained relatively strong. For the upper four quarters of 395 sales, the Median Price is $385,000, and for the lower four quarters of 415 sales, the Median Price is $333,000.

I feel a definite improvement in the market, or, if not, then at least we seem to be pretty stable at this lower level.

The S&P/Case-Shiller Home Price Indices, which is a trailing indicator, has also shown some signs of improvement. Its index for the Composite 20 Cities has improved this year from the March 2011 low of 137.63 to a July 2011 level of 142.77. Sadly the indices for Phoenix show 100.27 and 100.54 respectively, not as good a result, so far.

Foreclosure filings in August 2011 dropped 33 percent as compared with August 2010.

A study by the company RealtyTrac reveals a slowing rate of foreclosures within each of the top ten most foreclosure effected States. However, the press concentrated on the spike in Default Notices in August 2011. This was the biggest single month jump since August 2007, and pushed the numbers to a nine month high. As Default Notices are the first step in the foreclosure process, the press believed that this could foreshadow increased bank repossessions in the months ahead.

The authoritative Cromford Report, which concentrates on the Phoenix area, calmly pointed out that, although this spike may be true outside of Arizona, locally there seemed to be less significance. There was a noticeable rise in foreclosure notices from Recontrust, the company that handles notices for Bank of America, but notices from other trustees remained at the same level as July, and substantially down from 2010.

In the area of mortgages, with Congress failing to take action to extend the FHA and GSE mortgage limits, the maximum loan amounts have been substantially reduced. For the FHA, in Coconino County, the old limit of $450,000 is down to $333,500, a drop of $116,500, and in Yavapai County the old limit of $390,000 is down to $271,050, a reduction of $118,950. Despite continuing low mortgage rates, this is unlikely to be helpful, especially at the lower end of the market.

A key to obtaining a mortgage is an appraisal, and, sadly, Appraisers have come in for further criticism, as deals have fallen through due to lower values. Appraisers continue to do a thorough analytical and thoughtful job, based on diligent research, in order to arrive at their opinions. Their work has become more challenging, owing to the fewer number of sales comparables, lack of information where “special” deals were constructed, and the effect of “ordinary” sales versus distressed “As Is” sales. It may also be fair to say that the general public may not have realized how much home values have dropped since the housing boom. I believe it is important to consult local licensed Loan Officers, and to ask them to request a geographically competent Appraiser, someone who knows Sedona.

One of the comments I received from my last article was to do with vacant land values.

It is important to understand that prices for vacant residential lots lie along a curve. One cannot simply multiply the price of ¼ acre lot by four to obtain the value of 1 acre parcel, or vice versa. With that thought in mind, here is a chart of Sold Residential Vacant Lots in Sedona only. The series is calculated by taking the total value of sales in each month, and then dividing that by the total acreage of those sales.

Again the market seems to have stabilized in price terms. There are other factors which have an effect on evaluating vacant land, such as the difficulty in obtaining financing. This leads me to discuss the “engine” that drives the property market.

A licensed contractor has the ability to acquire a vacant parcel, construct a home, and put it on the market for sale. There are various costs attached to such an enterprise, as say the cost of the land, the cost of permits and engineering, the cost of materials, labor and financing, to name a few. The contractor, after all these costs, needs to turn a profit in order to feed his family. The contractor has to be able to compete effectively in the market place in order to achieve his goal. The current inventory and pricing structure, exacerbated by the number of distressed properties available to Buyers, is having a negative effect on such activity.

The chart, below, shows two series, smoothed by 6 month moving averages, of the number of Residential Home unit sales, and the number of Residential Vacant Lot unit sales. The chart starts in 2003.

You will note the relatively high correlation between Residential Home sales activity and Residential Vacant Land sales activity between 2003 and 2006.

My feeling is that that relationship has been temporarily broken due to the number of distressed properties for sale, and the “engine” will not return to normal until the economy improves sufficiently to allow us to absorb this inventory.

The Absorption Rate has been tiptoeing along close to the 10 month line, which is taken as the difference between a Buyers’ Market and a Transitional Market, for some time. Taking the last 12 months of activity, the Absorption Rate for Sedona Residential Homes only is 10 months. Below the $250,000price level, an area predominated by foreclosures, the Absorption Rate is only 3 months. In fact, below $600,000 it is close to 7 months only. The Lenders seem to be maintaining an inventory of listings around the 29 level, and are selling about 11 units per month, so the Absorption rate for distressed properties is approximately 2 ½ months.